IMF Concludes Article IV Consultation with the Republic of Congo

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On June 10, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo.1

Background

The gradual reestablishment of political stability and democratic institutions over the past four years has generated a sense of guarded optimism that the Congo is on the cusp of a structural break from the previous pattern of intermittent outbreaks of civil conflict. Over the past year, security improvements have been consolidated by the launch of the demobilization program for former combatants, and further progress has been registered with respect to the reestablishment of democratic institutions.

In the context of improved security, the pace of economic activity in the non-oil sector has increased (particularly in agriculture, commerce, and transportation). Non-oil real GDP increased by about 10 percent per annum on average during 2000-03. Consumer price inflation decelerated significantly in the postwar period, helped by a more reliable supply line from Pointe-Noire to Brazzaville and a strengthening of the euro.

Nonetheless, key social indicators have continued to deteriorate, and the external debt burden is heavy.

The fiscal position in 2003 improved from the exceptionally poor performance of 2002, but the underlying fiscal effort was weak relative to the 2003 budget. Higher-than-budgeted oil revenue, together with lower-than-budgeted investment and interest expenditures, generated an improvement in the overall fiscal balance to 0.4 percent of GDP in 2003 (from-8.1 percent in 2002). However, effective budget execution was hampered by weaknesses in expenditure controls, ineffectual treasury management, and delays in the implementation of non-oil revenue measures. A significant amount of windfall oil revenue was used to pay unbudgeted domestic commercial arrears. Steps were taken later in 2003 to start correcting these deficiencies.

In an encouraging sign of a pickup in non-oil sector activity, credit to the economy grew in 2003 at a faster rate than non-oil GDP for the first time in three years. Nonetheless, bank deposits decreased by 8 percent in 2003, partly in response to the difficulties in effecting current transfers. The recent privatization of the last remaining state-owned bank, Crédit pour l'Agriculture, l'Industrie et le Commerce (CAIC), in early 2004, coupled with the expected continued improvement in non-oil sector activity, should strengthen confidence in the banking sector.

The external current account remained relatively unchanged, with a surplus of 0.3 percent of GDP registered in 2003. The decline in oil export value, owing to a contraction in production that was only partially offset by higher prices, was offset by lower government imports and interest due on external debt. The authorities made efforts in 2003 to start normalizing relations with external creditors by (i) remaining current on debt-service payments to multilateral and Paris Club creditors (with the exception of one bilateral creditor), and (ii) clearing arrears to a few multilateral creditors. The Congo remains a heavily indebted country, with an external debt stock equivalent to about 185 percent of GDP at end-2003, two-thirds of which represents arrears.

On the structural front, performance was mixed in 2003. The audit of the SNPC for fiscal years 1999-2001 was completed, efforts were made to centralize government revenues, no new oil-collateralized debt was contracted, and initiatives were launched to publish oil sector data. Nonetheless, the privatization of the remaining publicly owned bank (CAIC) was delayed, and the end-September 2003 measures on oil sector transparency were not implemented. In the last quarter of 2003, a significant step was taken to enhance transparency in the oil sector with the completion of the certification by an external auditor of government oil revenue for 2003.

Executive Board Assessment

Executive Directors welcomed the progress toward political stability in the Republic of Congo as well as the improvements in security. Directors commended the authorities for the strengthening of the macroeconomic situation, marked by strong growth in economic activity, including in the non-oil sector, and the easing of inflationary pressures. They noted, however, that the fiscal outturn in 2003 was weak compared with the budget, notwithstanding some improvement relative to 2002, that key social indicators have continued to deteriorate, and that the external debt burden remains heavy. Building on recent positive steps aimed at ensuring that the Congo's resources are effectively harnessed for the benefit of all its people, Directors encouraged the government to broaden ownership of the reform program further and to press ahead with crucial reform measures in order to lay the basis for sustained growth and poverty reduction.

Directors expressed concern about the considerable shortfalls in economic performance in 2003 vis-à-vis the objectives embedded in the staff-monitored program (SMP). Most Directors considered that the opportunity provided by favorable oil market developments could have been used more effectively to reduce external arrears and normalize relations with the international community. A few Directors supported the authorities' decision to use part of the oil windfall to clear some domestic arrears. Directors welcomed the progress made in advancing structural reforms in some areas. However, they felt that more could have been done in implementing reforms in key areas, including oil sector transparency and the privatization of a publicly-owned commercial bank. They also expressed concern over the accrual of new external arrears that cannot be re-scheduled, and urged the authorities to remain current on amounts falling due to multilateral creditors and on Paris Club post cut-off debt claims.

Directors stressed the need to improve fiscal management and adopt a more comprehensive medium-term framework, particularly in light of the formidable challenges posed by the heavy reliance on oil revenues. They also stressed the importance of strengthening non-oil revenue collection, including by reducing the widespread use of ad hoc tax and customs exemptions, and by centralizing revenue collection at the treasury. On the expenditure side, Directors urged the authorities to increase poverty-related spending, which would require reducing unproductive transfers and carefully selecting investment projects. They welcomed the authorities' intention to adopt a fiscal rule to project oil revenues and to program expenditures based on conservative oil price projections, and highlighted the need for complementary measures to ensure that any windfall revenues are used in a clear and transparent manner.

Directors noted the importance of creating an environment favorable to private sector business and investment activity in order to promote economic diversification. They stressed the need to prevent further erosion in the competitiveness of the non-oil sector. In this context, Directors urged the authorities to exercise vigilance on the fiscal front and to take steps to reduce the high costs of doing business in the Congo.

Directors welcomed recent efforts to enhance transparency in the oil sector. They commended the authorities for the completion of the external audit of the national oil company (SNPC), covering the fiscal years 1999-2001; the external certification of oil revenues in 2003; and the publication of key oil sector data on the internet. Nevertheless, Directors noted that the audit of the SNPC had revealed weaknesses in management and accounting practices as well as severe limitations in access to information, and they urged the authorities to improve the auditors' access to information for the 2002 audit. Directors urged timely implementation of the action plan adopted by SNPC so that future audits may provide a more accurate picture of the company's financial operations. They also encouraged the authorities to continue to publish the production sharing agreements between the government and the oil companies.

Directors encouraged the authorities to press ahead with their structural reform agenda. In particular, they stressed the need to strengthen governance and the rule of law, and welcomed the preparation of the anticorruption program. Directors recommended addressing issues of property rights, including establishing a land title system. They urged renewed efforts to restructure the large public enterprises, particularly those expected to provide essential services. Directors welcomed the recent privatization of the remaining publicly-owned commercial bank, but noted that further efforts were needed to strengthen the financial sector. To allow commercial banks to play a more effective role in economic development, they noted that it was essential to address structural impediments to commercial bank lending to the private sector, in particular the weaknesses in the legal framework. Directors also called for forceful implementation of the regional framework on laws to prevent money laundering and the financing of terrorism.

Looking forward, Directors welcomed the authorities' renewed determination to establish a track record of policy performance including maintaining orderly relations with external creditors that could allow the Congo to move to a Fund-supported program. They were encouraged by the satisfactory results in the first quarter of 2004 under the six-month SMP. To ensure the support of the international community, including for possible debt relief, Directors stressed that enhanced public access to oil sector information should be a key aspect of a strategy to broaden ownership of the reform program, lower the probability of future conflicts, and enhance accountability. To this end, they emphasized the need for full transparency on all oil-related transactions. They welcomed the authorities' decision to participate in the Extractive Industries Transparency Initiative (EITI).

Directors encouraged the authorities to finalize preparation of the interim poverty reduction strategy paper (I-PRSP), implement a functional budget classification system to help monitor poverty-related outlays, and carry out the poverty-related surveys necessary to improve the social database.

Directors welcomed ongoing improvements of the statistical database, including the recent decision to participate in the IMF's General Data Dissemination System and the budgetary increases for statistical development. They urged the authorities to continue to expand further the coverage of the national statistics, including with respect to the coverage of the oil sector and poverty monitoring, and to make full use of the technical assistance from the Fund and other development partners.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.